TAXATION

POWER OF TAXATION
Process of collecting money to defray expenses
of the government
Inherent power of the state: no need for a
constitution or enabling statute for the State to
exercise the power of taxation

LOCAL GOVERNMENT UNITS AND POWER OF

TAXATION
Prior to the 1987 Constitution, there needs to
be an enabling law before LGUs can collect
taxes.
With the effectivity of the 1987 Constitution,
the power of taxation is no longer delegated to
the LGUs but is directly conferred by the
Constitution.
The Constitution has a provision on Local
Autonomy (Article X)

Sec.5 Each local government unit shall have the power

to create its own sources of revenues and to levy taxes,
fees and charges subject to such guidelines and
limitations as the Congress may provide, consistent with
the basic policy of local autonomy. Such taxes, fees and
charges shall accrue exclusively to the local
governments.

TAXATION BEING A POWER

1.
2.

Inherent
Supreme, Plenary, Unlimited and
Comprehensive

Can cover all subject matters provided in

accordance with limitations (both inherent
and constitutional limitations)

POWER TO TAX: POWER TO DESTROY?

Justice Marshall: The power to tax includes the power
to destroy

The state can use the power of taxation to

kills any business

Justice Holmes: The power to tax does not include the

power to destroy while this court sits
How to reconcile? The principle of Justice Marshall
applies only to valid taxes, while that of Justice Holmes
applies to invalid taxes.

If a tax imposed is valid, it can be used by

the state to destroy.
If it is an invalid tax, the state cannot use
the power to tax to destroy a business.

OBJECTIVES OF THE POWER OF TAXATION

1.
2.

Revenue Purposes
Non-revenue Purposes
(a) Promotion of general welfare
Taxation can be used as an implement of
police power

e.g. Excise Tax: a type of business tax;

higher rate of tax can be imposed to certain
industries (cigarettes, alcohols because the
state discourages the use of these products)
(b) Regulation

PAL v Edu: The state imposed a regulatory tax

(imposed to raise revenues and regulate a
subject matter)
(c) Reduce Social Inequity

Progressive System of Taxation

Ability to pay principle: the higher the

income, the higher the tax.
(d) Encourage Economic Growth

Congress can grant incentives to promote a

particular industry
(e) Protectionism

Imposition of custom duties to protect locally

manufactured goods
e.g. smuggled goods
LIFEBLOOD DOCTRINE

Taxes are lifeblood of nation and without taxes,

the states cannot exist.
The source of the power to tax is the main
existence of the state

JUSTIFICATIONS OF THE POWER OF TAXATION

1. Benefits-Received Theory

We pay taxes because of the protection

that we receive
2. Symbiotic Relationship Theory

Notwithstanding reluctance, we must

pay
because
without
it,
the
government cannot provide protection
to its citizens.
3. Necessity Theory

Taxes
are
necessary
for
the
government to operate

Lifeblood doctrine
Benefits-Received
Theory
Benefits
have
been
received, so we must pay
tax.

Symbiotic Relationship
Theory
We must pay tax because
benefits
will
be
received
from
the
government

CHARACTERISTICS OF THE POWER OF TAXATION

1.

2.
3.

4.

Must be for public purpose

Produce direct or indirect benefits to the people
e.g. Collection of tax to prevent tuberculosis
o Living in a healthy society is an indirect
intangible benefit
Inherent
Inherently Legislative
The power of taxation can only be exercised by
the legislature by enactment of a law
authorizing a tax
Territorial


5.
6.

It can only be exercised within the jurisdiction

of the state
Recognizes Tax Exemption of State
Limited

government itself. It is therefore necessary to reconcile the

apparently conflicting interests of the authorities and the
taxpayers so that the real purpose of taxation, which is the
promotion of the common good, may be achieved

SISON vs. ANCHETA

Power to tax is the power to build

With the modern times, there is a need for more

revenues to meet increasing social challenges.

Lifeblood doctrine

It is manifest that the field of state activity has

assumed a much wider scope xxx Hence the need for more
revenues. The power to tax, an inherent prerogative, has to
be availed of to assure the performance of vital state
functions. It is the source of the bulk of public funds. To
praphrase a recent decision, taxes being the lifeblood of
the government, their prompt and certain availability
is of the essence.

PHILIPPINE HEALTH CARE PROVIDERS vs. CIR

Documentary Stamp Tax of PHCP: 376

Net worth of PHCP: 259M (assets minus
liabilities)
PHCP alleges that the state is taxing it out of
existence
CIR alleges the principle of Power to tax is the
power to destroy
Involved valid tax
VAT was found valid; DST was invalid
DST can only be collected if the industry is an
insurance provider. PHCP is not an insurance
provider but a health service provider. Thus,
DST cannot be imposed upon it.
Since DST is an invalid tax (being imposed
to a health service provider), the power
to tax is not the power to destroy.
While it is true that the power to tax is
unlimited, supreme, plenary, unlimited and
comprehensive, it must be exercised with
precaution to avoid injury to proprietary rights
of taxpayer. It must be fairly, equally and
uniformly imposed.

The power of taxation is sometimes called also the

power to destroy. Therefore it should be exercised with
caution to minimize injury to the proprietary rights of a
taxpayer. It must be exercised fairly, equally and uniformly,
lest the tax collector kill the "hen that lays the golden egg."
Legitimate enterprises enjoy the constitutional
protection not to be taxed out of existence. Incurring
losses because of a tax imposition may be an acceptable
consequence but killing the business of an entity is another
matter and should not be allowed. It is counter-productive and
ultimately subversive of the nations thrust towards a better
economy which will ultimately benefit the majority of our
people

CIR vs. ALGUE

Lifeblood doctrine

Taxes are the lifeblood of the government and so

should be collected without unnecessary hindrance. On
the other hand, such collection should be made in accordance
with law as any arbitrariness will negate the very reason for

Symbiotic Relationship Theory

Those who can contribute must do so

Government responds to the taxes that we

pay in the form of tangible and intangible
benefits

It is said that taxes are what we pay for civilization

society. Without taxes, the government would be paralyzed for
lack of the motive power to activate and operate it. Hence,
despite the natural reluctance to surrender part of
one's hard earned income to the taxing authorities,
every person who is able to must contribute his share
in the running of the government. The government for
its part, is expected to respond in the form of tangible
and intangible benefits intended to improve the lives
of the people and enhance their moral and material
values. This symbiotic relationship is the rationale of taxation
and should dispel the erroneous notion that it is an arbitrary
method of exaction by those in the seat of power.

Taxes must be reasonably collected

Even
as
we
concede
the
inevitability
and
indispensability of taxation, it is a requirement in all
democratic regimes that it be exercised reasonably
and in accordance with the prescribed procedure. If it is
not, then the taxpayer has a right to complain and the courts
will then come to his succor. For all the awesome power of the
tax collector, he may still be stopped in his tracks if the
taxpayer can demonstrate, as it has here, that the law has not
been observed.

NAPOCOR vs. CITY OF CABANATUAN

Source of the exercise of taxing power: the very

existence of the state

Theory behind the power of taxation: Necessity

So that the government can also

provide for the citizens

To promote general welfare

LGU can exercise the power of taxation

Directly conferred by the Constitution

(Sec 5. Article X, 1987 Constitution)

The Local Government Code was enacted by

the Congress
Q: Does it grant the power to tax to the LGUs?
A: No. It only sets limitation to the taxing power
of the state and does not grant the power to
collect the tax. It is the Constitution that
grants the power to tax.

PHILIPPINE AIRLINES vs. EDU

Fees are being imposed to PAL in the form of

registration fees.

SC: they are actually taxes.

They are taxes. Tax are for revenue, whereas fees are
exactions for purposes of regulation and inspection, and are
for that reason limited in amount to what is necessary to
cover the cost of the services rendered in that connection.

If the purpose is primarily revenue, or if revenue is, at least,

one of the real and substantial purposes, then the exaction is
properly called a tax.

The fees are used for construction of highways.

Only a portion is used for the operation of the
motor vehicles. Since the fees are used for a
public purpose, they are considered taxes.

TIO vs. VIDEOGRAM REGULATORY BOARD

Taxes were not considered oppressive

it is beyond serious question that a tax does not
cease to be valid merely because it regulates,
discourages, or even definitely deters the activities
taxed.
The power to impose taxes is one so unlimited in force
and so searching in extent, that the courts scarcely venture to
declare that it is subject to any restrictions whatever, except
such as rest in the discretion of the authority which exercises
it. In imposing a tax, the legislature acts upon its constituents.
This is, in general, a sufficient security against erroneous and
oppressive taxation.

Tax was used both as a regulatory and revenue

measure

The tax imposed by the DECREE is not only a regulatory but

also a revenue measure prompted by the realization that
earnings of videogram establishments of around P600 million
per annum have not been subjected to tax, thereby depriving
the Government of an additional source of revenue

Tax as an instrument of police power: to protect

video industry
Tax does not cease to be valid merely because
it regulates, discourages or even definitely
deters the activities taxed.

1.
2.
3.

Tax as an implement of police power to

promote general welfare

The tax is levied with a regulatory purpose, i.e. to

provide means for the rehabilitation and stabilization of the
threatened sugar industry. The act is primarily an exercise of
police power and is not a pure exercise of taxing power.
As sugar production is one of the great industries of the
Philippines and its promotion, protection and advancement
redounds greatly to the general welfare, the legislature found
that the general welfare demanded that the industry should
be stabilized, and provided that the distribution of benefits
had to sustain.

CIR vs. CENTRAL LUZON DRUG CORPORATION

Tax Credit vs. Tax Deduction

Tax Credit: deduction from tax liability
Tax Deduction: reduction from the income
One of these is tax deduction -- defined as a
subtraction "from income for tax purposes," or an amount that
is "allowed by law to reduce income prior to [the] application
of the tax rate to compute the amount of tax which is due."
On the one hand, a tax credit reduces the tax due,
including -- whenever applicable -- the income tax that is
determined after applying the corresponding tax rates to
taxable income.21 A tax deduction, on the other, reduces the
income that is subject to tax22 in order to arrive at taxable
income.23 To think of the former as the latter is to avoid, if
not entirely confuse, the issue. A tax credit is used only after
the tax has been computed; a tax deduction, before.

Elements of the Power of Eminent Domain

The corporation can incur whatever has been

lost through the grant of tax credit.
RA 9994: The 20% discount is already
considered as tax deduction.

THREE STAGES IN THE TAX PROCESS

1. Levy

Power of
Taxation can be
through the law-making body

How? By enactment of laws

Nature: inherently legislative

2.

Assessment

Computation of taxes

Nature: administrative

3.

Collection

Administrative in character

exercised

PRINCIPLES OF A SOUND TAX SYSTEM

1.

Fiscal Adequacy

Fiscal: money
Adequacy: sufficient

Sufficient funds

As much as possible, there would be no

deficit and excessive surplus.

2.

Administrative Feasibility

Tax laws should be capable of convenient,

just and effective administration

3.

Theoretical Justice

Founded on the ability-to-pay principle

Pay because youre able
Kindred concept of progressive system
of taxation
The higher the income, the
higher the tax

LUTZ vs. ARANETA

Taking of private property: 20% of the gross

sale
For public use: discount for the senior citizens
For just compensation: tax credit

Section 28, Article VI of the Constitution

The Congress must evolve a
progressive system of taxation
Q: Will a violation of these principles result to
unconstitutionality of the tax law?
A:
General Rule: NO
These are merely principles. They are guidelines and
are therefore not mandatory
The Constitution provides that the Congress must
evolve a progressive system of taxation, but does not
prohibit regressive system of taxation. For example,
VAT is valid eventhough it does not consider the ability
to pay principle because it is automatically imposed
upon the consumers. The progressive system of
taxation is merely encouraged and regressive system
of taxation is merely frowned upon.

Except: If a law that violates theoretical justice is

harsh, oppressive and confiscatory such that it violates
due process.